Understanding
Stock Options Trading
and Technical Analysis Basics

Calls and Puts - Buying Stock Options

So far in our previous housing example, we bought an option hoping that the price of the house will go up. That is actually just one type of option, called a Call Option.

One reason why investors like buying stock options is because you can profit from them whether your stock goes up in price, or down. This differs from buying normal stocks, where you only make money when your stock goes up in price. This is because there are various types of options in the market, to suit the needs of different investors. The 2 simplest forms are the Call Option, which we mentioned above, and its opposite, Put Options.

Basically, when buying stock options, you would buy a Call Option if you expect the underlying stock price to go up. Conversely, you would buy Put Options on a stock which you expect to drop. If it seems too difficult to remember the difference between calls and puts when buying stock options, you might want to remember this adage instead: You Call Up your friend to talk, and when you're done, you Put Down the phone.

Easy to remember isn't it? The call option is for when you expect the stock to go up, otherwise known as a Long Position. Put options are for when you expect the stock to go down, otherwise known as Short Positions.

Summary:

While you only profit with stocks when they go up, you can profit with options both when the stock goes up or down. The 2 basic types of options are Calls and Puts. Remember: you Call Up a friend, and you Put Down the phone when you're done.

Now comes the tricky part. If a Call Option gives you the right, but not the obligation, to buy a stock at a later date, what do Put Options do? Exactly the opposite. Put Options give you the right, but not the obligation, to sell a stock at a later date.

Put options are usually more difficult to understand than the straightforward Call option, because to "use" or "exercise" Put options, you need to own the related stock first, since "exercising" the option would require you to sell the stock.

Suffice to say at this point that when buying stock options, you would buy Put Options when you expect the price of the related stock to go down.

Summary:

Exactly opposite to the Call Option, when you buy Put Options, you have the right, but not the obligation, to sell the stock. You would profit if the price of the stock goes down.

So, to repeat the difference between Calls and Puts, you would buy a Call option if you expect the stock in question to go up, and you would buy Put options if you expect the stock to go down.